When reviewing credit requests,  lending institutions focus on financial resilience, repayment ability, and management quality.  Below are some key metrics and why they matter:

 

1. Cash Flow Coverage

Metric: Debt Service Coverage Ratio (DSCR), comfort level of 1.25x+.

Rationale: Demonstrates capacity to service debt from operations. Provides lenders confidence that obligations can be met even during downturns.

 

2. Leverage and Balance Sheet Strength

Metrics: Debt-to-Equity; Tangible Net Worth.

Rationale: High leverage signals financial strain. Banks expect meaningful owner equity and a solid net worth cushion to absorb volatility.

 

3. Liquidity Position

Metrics: Current Ratio, Quick Ratio.

Rationale: Reflects ability to handle short-term obligations. Adequate liquidity reassures banks that payroll, suppliers, and other commitments can be met without stress.

 

4. Profitability Trends

Metric: EBITDA and margins over time.

Rationale: Consistent profitability shows sustainability. Banks place more weight on stable recurring earnings than one-time windfalls.

 

5. Industry & Revenue Concentration

Metrics: Customer concentration; sector exposure.

Rationale: Heavy reliance on a single customer or sector increases risk. Diversification strengthens resilience and credit standing.

 

6. Collateral and Security

Metrics: Value and quality of receivables, real estate, inventory, equipment.

Rationale: Collateral is the bank’s secondary repayment source. Readily marketable assets improve loan structures and pricing.

 

7. Management & Governance

Metrics: Depth of leadership, reporting quality, governance standards.

Rationale: Banks lend to people as much as businesses. Experienced, transparent management teams foster lender confidence.

 

Commercial banks assess more than profit—they focus on repayment capacity, balance sheet strength, and overall leadership/management quality.